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Oce Announces Q3 Results: Revenues Lower on Delivery Problems

Press release from the issuing company

CHICAGO -- Comments by CEO Rokus van Iperen: 'DDS, excluding Oce Imagistics, had a disappointing quarter. Revenues decreased as a result of delivery problems and price pressure in the market. In the meantime we have a well-filled order portfolio and the delivery problems have largely been solved, which means that revenues will pick up again to a substantial extent in the fourth quarter. The integration of Oce Imagistics continues to progress well. The business synergies and cost savings planned for 2006 will be achieved. WFPS again booked strong quarterly results and also has a strong order position for the fourth quarter. Strong, new products, the growing momentum of Oce Imagistics and the full effect of the cost-reduction measures will provide support for revenues and income.' Revenue growth lags behind in DDS. Revenues in WFPS continue to develop well Total revenues in the third quarter amounted to Euro 740.6 million, an increase of 14.0%. After adjustment for exchange rate effects the increase was 15.8%. Non-recurring revenues were up by 11.6% (13.0% after exchange rate effects). Recurring revenues increased by 14.9%. Excluding the impact of exchange rate effects the increase amounted to 16.8%. The table on page 9 gives a breakdown of the indicative development of revenues, excluding the acquisition of Imagistics and exchange rate effects. These revenues decreased by about 1.3% in the third quarter. Non-recurring revenues, excluding acquisitions and exchange rate effects, decreased by about 5.5%. This decrease in revenues took place entirely within Digital Document Systems and was attributable not only to market developments but also to new European legislation that was introduced on July 1 of this year. This legislation led to a temporary shortage of components, which affected a few suppliers in particular, and this resulted in a backlog in the delivery of orders. In the meantime the shortages have been solved and good progress is being made towards clearing away the backlog in the delivery of orders to customers. Excluding Imagistics and exchange rate effects, recurring revenues increased by about 0.5%. The gross margin remained unchanged at 41.7%. Excluding Imagistics there was a margin decline of about 1%. This decrease was caused by a more aggressive pricing strategy in the sales of printing systems and by volume/mix effects. Operating expenses, excluding Imagistics, decreased by about 1% to 38.5% of total revenues. In part, this is a consequence of the lower operating expenses brought about by past restructuring measures. Operating income up by 27.0% Operating income before depreciation and amortisation (EBITDA) amounted to Euro 66.7 million, an increase of 39.2% compared to 2005. Operating income before amortisation (EBITA) was Euro 25.9 million (2005: Euro 16.8 million). Operating income increased by 27.0% to Euro 16.7 million (2005: Euro 13.2 million). The following table of the normalised operating income provides a better insight into the development of the operating income (EBIT). Thanks to the competitive strength and the resultant income potential of the new products, the amount that Oce capitalises in the form of R&D expenditure increased by Euro 8.0 million in the third quarter. Interest instruments cause greater volatility in financial expense In the second quarter the value of the interest instruments that had been taken out to protect Oce against climbs in interest rates increased by Euro 4.6 million. Because long-term interest rates -for the dollar in particular- decreased in the third quarter, the value of the interest instruments went down by Euro 1.5 million. This decrease in value has been included in financial expense (net), which meant that on aggregate financial expense (net) worked out at Euro 14.0 million. Taxation contributed Euro 3.4 million to the result. This contribution results to a larger extent from the capitalisation of tax-offsettable losses. Net income amounted to Euro 6.4 million (2005: Euro 8.6 million). Operating income before depreciation and amortisation (EBITDA) increased by 38.9% to Euro 0.79 per ordinary share (2005: Euro 0.57). Net income per ordinary share outstanding amounted to Euro 0.07 (2005: Euro 0.10). Disappointing revenues and income for Digital Document Systems Total revenues of the Strategic Business Unit Digital Document Systems (DDS) were disappointing. These amounted to Euro 527.4 million (2005: Euro 442.6 million). The increase in revenues was the result of the acquisition of Imagistics (approx. 25%). Revenues in DDS, excluding Imagistics, were around 4% lower. The increase in non-recurring revenues amounted to 15.1% (including a decrease of 1.1% due to exchange rate effects). The contribution of Imagistics to the growth in non-recurring revenues was around 29%, whilst the other non-recurring revenues in DDS decreased by about 12.5%. Recurring revenues climbed to Euro 389 million, an improvement of 20.7% (including a decrease of 1.9% due to exchange rate effects). Imagistics contributed some 23.5% to the growth in revenues. Excluding Imagistics and exchange rate effects, recurring revenues decreased by about 1%. The operating income of DDS was - Euro 4.3 million (2005: - Euro 4.7 million). The normalised operating income was - Euro 1.3 million. EBITA for the quarter amounted to Euro 2.2 million (2005: - Euro 2.6 million). The decrease in revenues in DDS, excluding acquisition effects, was due partly to delivery problems and partly to price pressure. A further tightening of the pricing policy has meanwhile led to an increase in the number of orders. Oce is starting the fourth quarter with a well-filled order portfolio, which will bring a recovery in revenues development and operating income. New product introductions have strengthened our competitive position. One of those new products, the Oce Varioprint 6250, has received a very positive market reception. This confirms the good evaluations published in reports by industry analysts. Deliveries to market will start in the fourth quarter in the United States and several European countries. As from the first quarter of 2007 the machine will be rolled out to more markets. The integration of Imagistics is also progressing favourably, whilst the positive results of the restructuring operations in Europe and the United States are starting to show through. Wide Format Printing Systems puts in outstanding performance In the Strategic Business Unit Wide Format Printing Systems revenues increased by 3.0% to Euro 213.2 million. Excluding exchange rate effects the increase amounted to 4.9%. Non-recurring revenues were 5.3% higher. After adjustment for exchange rate effects, the increase amounted to 7.2%. Recurring revenues were up by 1.9%. Excluding exchange rate effects the increase amounted to 3.8%. Operating income amounted to Euro 21.0 million (2005: Euro 17.9 million). The normalised operating income was Euro 21.7 million. Non-recurring revenues increased as a result of growing sales of both black-and-white and colour machines in the design engineering and graphics markets. Higher sales of ink, toner, services and paper brought an increase in recurring revenues, which were likewise achieved in both market segments. In WFPS, too, the shortage of components for a number of products led to a temporary slowdown in deliveries to market. These shortages have meanwhile been solved, which means that the portfolio of accumulated orders can be delivered to market. New products such as the Oce TCS300 for the design engineering market and the Oce Arizona 250 GT for the graphics market will further stimulate the growth in colour. First nine months 2006 Total revenues in the first nine months amounted to Euro 2,278.3 million, an increase of 19.1% (excluding exchange rate effects: 17.7%). Non-recurring revenues were up by 17.3%, of which 1.3% was the result of exchange rate effects. Recurring revenues increased by 19.8% (excluding exchange rate effects: by 18.3%). The gross margin was 41.9%. Excluding Imagistics the margin declined by about 1%. Excluding Imagistics, operating expenses as a percentage of revenues decreased from 39.6% to about 38.2%. Operating income was Euro 58.5 million, an increase of 39.5% compared to the first nine months of 2005 (Euro 41.9 million). EBITDA amounted to Euro 208.7 million (2005: Euro 145.8 million). Net income was 7.5% higher at Euro 30.5 million. Net income per ordinary share amounted to Euro 0.35 (2005: Euro 0.32). Oce Imagistics: a success The integration of Oce Imagistics is bearing fruit, in terms of both cost synergies and "cross selling". A substantial number of contracts have meanwhile been concluded, with the strength of the Oce Imagistics combination playing a decisive role in the acquisition of the order. The momentum that has been created over the past period will lead to an acceleration of future sales successes. The business synergies have contributed Euro 3 million to the operating income (EBIT) of Oce. An amount of Euro 8 million in the form of cost savings has already been realised. The business synergies of Euro 5 million planned for 2006 will be achieved, as will the cost savings (Euro 10 million). It has meanwhile been decided that, in the area of information management, Oce Imagistics will be integrated within a common global Oce system based on SAP technology. This integration will take place in 2008/2009. Balance sheet and cash flow At the end of the third quarter the balance sheet total stood at Euro 2,645 million, a decrease of Euro 196 million compared to the balance sheet at the end of 2005. This reduction was mainly due to lower liquid funds (Euro 64 million), a decrease in trade accounts receivable (Euro 53 million) and in receivables from leases (Euro 32 million). In addition, tangible and intangible fixed assets decreased by Euro 48 million. In the third quarter some further minor adjustments of Imagistics were made in the opening balance sheer, with the result that goodwill increased by Euro 7.6 million. Free cash flow during the first nine months amounted to -Euro 8.7 million (2005: Euro 12.6 million). Cash flow for the full 2006 financial year will be positive. Interim dividend For the 2006 financial year an interim dividend of Euro 0.15 (2005: Euro 0.15) per ordinary share will be distributed. The shares will go ex-dividend on October 4, 2006. The interim dividend will be made available entirely in cash and will become payable as from October 23, 2006. Prospects for 2006 The prospects for final quarter of 2006 are positive. The backlog in deliveries of orders that had arisen in the third quarter will be cleared away to a substantial extent in the fourth quarter. Strong, new products, the growing momentum of Oce Imagistics and the full effect of the cost-reduction measures will provide support for revenues and income. Operating income for the year 2006 is expected to work out at around Euro 90 million.

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