MALVERN, Pa.-- IKON Office Solutions, the world's largest independent channel for document management systems and services, today reported results for the first quarter of fiscal 2007 ended December 31, 2006. For the first quarter, net income was $27 million, or $0.21 per diluted share, representing a 20% increase over the adjusted $0.18 in the first quarter of fiscal year 2006, and in line with the Company's previously communicated guidance of $0.20 to $0.22. As reported, earnings per diluted share increased 3% year over year. Total revenue for the first quarter of fiscal year 2007 was $1 billion, down 3% year over year, including a 1% currency benefit. Targeted revenue, which represents 98% of total revenue, declined 2% compared to the same quarter last year. Selling and administrative expenses decreased $26 million year over year and represented 28.6% of revenue in the first quarter, in line with the Company's expense-to-revenue ratio goal of less than 29% for fiscal year 2007. The decrease in selling & administrative expenses was primarily driven by pension savings, and reductions in IT, real estate and other corporate expenses. Operating income margin in the first quarter of 2007 was 4.9%, representing a 22 basis point improvement from the adjusted 4.6% reported in the first quarter of 2006. As reported, operating income margin declined 25 basis points year over year due to the gain from the sale of Kafevend in the first quarter of 2006. The Company's effective tax rate for the quarter was 31.5%. The Company anticipates the tax rate for the remainder of the fiscal year to be in the range of 36% to 37%, bringing the full year rate to between 35% and 36%. "While we met our EPS guidance for the quarter, we are focused on our top line performance and are taking actions to address revenue growth," said Matthew J. Espe, IKON's Chairman and Chief Executive Officer. "We also remain focused on spending reductions and on the roll out of One Platform, our initiative to migrate to a single IT platform in the U.S. We continue to expect that our U.S. migration to One Platform will be two-thirds complete by the end of fiscal 2007." First Quarter 2007 Financial Details Equipment revenue of $416 million, which includes the sale of copier/printer multifunction products, declined 2% from the first quarter of fiscal year 2006. The year-over-year decline was driven primarily by lower revenue in the black and white office and production segments due to continued pricing pressures in line with industry trends, partially offset by color revenue growth and currency. A higher mix of used equipment sales year over year also contributed to the revenue decline but helped improve the Company's gross margin to 25.0% from 23.9% in the first quarter of fiscal year 2006. Customer Service and Supplies revenue of $346 million, which includes revenue from the servicing of copier/printer equipment and direct sales of supplies, decreased 7% year over year. Customer Service revenue declined due to lower revenue per copy on flat total copy volume, partially offset by currency. The Company believes this declining year-over-year trend will continue, but improve as the year progresses. Gross margin on Customer Service and Supplies decreased to 43.9% from 46.4% a year ago, driven by lower revenue in Customer Service, partially offset by lower cost. Managed and Professional Services revenue of $192 million, which includes both on-site and off-site Managed Services, as well as Professional Services, increased 9% compared to the first quarter of fiscal year 2006. Revenue grew in all three service areas. On-site Managed Services revenue grew 7% year over year, off-site Managed Services revenue grew 5%, and Professional Services revenue grew 37%. Gross margin on Managed and Professional Services increased to 26.0% from 25.4% a year ago, due to improvements in on-site Managed Services' contract profitability and Professional Services. Rental and Fees revenue of $35 million declined 12%, primarily due to the sale of the U.S. retained lease portfolio. Gross margin increased to 72.0% from 68.3% a year ago. Targeted revenue includes all revenues except those categorized as "Other." In fiscal 2007, Other revenue includes finance income from the Company's European leasing business and revenue generated by the remaining European technology services and hardware businesses. In fiscal 2006, Other revenue also included finance income from the Company's U.S. retained and German lease portfolios, which were sold during fiscal 2006. Other revenue of $18 million declined 40% compared to the first quarter of fiscal year 2006, primarily due to the sale of the U.S. retained lease portfolio. Balance Sheet and Liquidity Cash was $366 million as of December 31, 2006, and cash used in operations totaled $8 million for the first quarter, compared to a usage of $38 million in the first quarter of last year. The Company generally uses cash in the first quarter primarily due to annual bonus payments. Capital expenditures on operating rentals and property and equipment, net of proceeds, totaled $9 million for the first quarter, compared to $8 million for the first quarter of fiscal year 2006. Free cash flow improved $28 million year over year. The Company continues to anticipate that it will generate free cash flow in the range of $80 million to $120 million in fiscal 2007. The Company's total debt-to-capital ratio remained stable at 33%. For the first quarter, fully diluted weighted average shares were 129 million. At the end of the quarter, actual shares outstanding were 126 million, a reduction of 6% year over year, driven by the Company's share repurchase program. The Company purchased 2 million shares for $34 million during the first quarter. The Company recently solicited consents from the holders of its 2015 Notes to amend certain provisions of the related bond indenture. While the amendment was not approved by the required majority of note holders, this result does not affect the Company's ability to continue its share repurchase program and maintain its dividend. The Company continues to expect to purchase $75 million to $100 million of its common stock during fiscal 2007, as previously communicated. IKON's Board of Directors approved the Company's regular quarterly cash dividend of $0.04 per common share, payable on March 10, 2007 to holders of record at the close of business on February 20, 2007. Outlook "Looking ahead, for the second quarter of 2007 we expect earnings per diluted share to range from $0.19 to $0.21," said Espe. "We are not pleased with our top line performance in the first quarter. However, we are accelerating color placements to increase our color copy volume mix, our product portfolio will continue to strengthen which will help us grow equipment placements and revenue, and we expect Managed and Professional Services to continue to deliver strong results. For these reasons, we believe our strategy to drive core growth is achievable. Additionally, we remain committed to continued spending reductions. "Our expectations for fiscal year 2007 earnings per diluted share remain in the previously communicated range of $0.90 to $0.95."