Sliding Danka faces skeptical investors

By SCOTT BARANCIK

© St. Petersburg Times, published July 28, 2000

ST. PETERSBURG -- Top executives at Danka Business Systems tried Thursday to convince Wall Street that its quarterly report was not as bad as it looked. Judging by the 15 percent plunge in its stock, they met with little immediate success.

"We're obviously disappointed at the revenue," chief executive Larry K. Switzer said in a conference call with analysts and investment managers. But it "isn't fair" to draw conclusions about the company's financial performance without knowing the underlying details.

Maybe not, but shares of the copier distributor's stock fell 50 cents, to close at $2.88 a share, a 52-week low. The stock came dangerously close to hitting its all-time low of $2.81 a share and traded at well over twice normal volume.

The report released late Wednesday represented the second consecutive money-losing quarter for St. Petersburg-based Danka, which sells, leases and services copiers manufactured by Toshiba, Canon and Heidelberg. It lost $1.2-million in the quarter ended June 30, compared to earnings of $12.2-million in the same period a year prior. Revenues fell 16 percent to $540-million.

In trying to explain that the company is simply going through a rough period, Switzer pointed to Europe, where the company does roughly half its business. Revenue would have been stronger there, he said, but the strong dollar ate into sales.

One clearly unconvinced participant in the conference call suggested that Danka's top executives might tie their compensation packages more closely to the company's stock performance. Switzer's salary rose from $329,000 to $800,000 in the last fiscal year, while his bonus rose from $450,000 to $1.2-million. President Brian Merriman's bonus and salary rose from a combined $632,000 to $1.6-million.

Both men were brought on board in 1998 to turn around the 23-year-old company. It went public in Dec. 1992 and saw its stock climb above $50 in 1996 but ran into trouble when it purchased Eastman Kodak Co.'s copier business.

Danka officials said they are somewhat uncertain about what future months will bring. During Thursday's conference call, they declined a request to predict future earnings, saying only that they believe the worst already has come.

However, they discouraged wishful thinking about a rebound in the quarter ending Sept. 30, pointing out that it's summer in Europe, when little business gets done. They also acknowledged that prior earnings projections of 80 to 85 cents a share for fiscal year 2001 would need to be downsized.

Much has changed in the copier business in recent years. Most copiers, once analog, are now digital, which means they can be hooked up to computer networks and act as printers as well as copiers. In the quarter ended June 30, about 82 percent of Danka's hardware revenue came from the sale of digital copiers, according to investor relations director Sanjay Sood.

But while digital copiers generally have higher price tags, they cost less to service. Customers know this, Sood said, so service contracts for the digital copiers are being driven lower. Competition with Xerox and Ikon is reducing the margins even more.

That's a problem for Danka, which gets two-thirds of its revenue from providing service and supplies for copiers and less than one-third from the retail sale of the copiers.

Danka officials said they have several ideas on how to boost future revenue and earnings.

One is to expand their network solutions business, known as Danka Services International. It's a relatively high-margin service that involves linking up corporate printers, computers and copiers by network and managing them. Officials called it their "jewel" and a "cornerstone" of future growth.

But reaction to the latest earnings report on the Yahoo message board devoted to Danka was swift and bitter.

"To the next person who says "Next month is a turnaround month': Please leave your address so I can come to your house and beat the ---- out of you," said an investor who writes under the nom de plume "shadowman0000."

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