For Xeikon, a Flanders-based maker of short-run digital printers, 1996 has been a learning experience in more ways than the seven-year-old company expected.
It has experienced at first hand investors' enthusiasm for high-tech stocks - and how they take fright at the slightest hint that growth may be faltering.In March, Xeikon was one of the year's most successful flotations on Nasdaq, the U.S. fast-growing companies market. Shares offered at $15 each - valuing the company at $428 million - hit $25 on the first day of trading, before closing at $20, capitalizing Xeikon at $570 million.
Last month, though, when it warned that second-quarter and full-year profits would be lower than analysts' forecasts because of disappointing orders, its shares slumped to $9 in two days.
For young businesses considering the benefits and possible traps of a stock market listing, Xeikon provides both a model and a warning. For a company that has enjoyed dramatic growth, the past few weeks have been sobering. But the management has no regrets about exposing itself to the harsh realities of the market.
"Why did we go on Nasdaq? To finance a capital increase, and allow some shareholders to sell part of their shares," says Marc Blanpain, chief financial officer. "Those targets have been achieved. Now we must re-establish confidence."
Xeikon was founded in 1988 by Lucien De Schamphelaere, now 65. For 35 years, he was a print specialist with Agfa-Gevaert, the photographic subsidiary of chemical group Bayer. Agfa asked him to study the kind of technology his company now produces - digital printing units, capable of carrying out high-quality color jobs in short runs and with varying contents, quickly and at low cost.
He identified a gap in the market between office printers and photocopiers, slow and expensive for anything over 50 copies, and conventional offset printing equipment, where the long set-up time and need for a printing plate mean runs of fewer than 5,000 copies are not cost-effective.
His idea was to use digital technology that allows the printer to vary the data being printed, even when it's running at full speed. That allows the same price per page, regardless of the number of copies required.
Agfa offered De Schamphelaere the chance to set up a spinoff company to develop the technology. It leased premises to him and retained a 21.5 percent stake after this year's share offering.
De Schamphelaere also attracted investment from venture capitalists and development grants from Flemish regional authorities.
By 1993, the company had produced 12 prototype printing heads, called DCP-1. De Schamphelaere was convinced his prototype could be a viable product, but he needed money to finance a manufacturing plant.
He was introduced by one of his original backers to Alex Brown, the U.S. investment bank which has made something of a speciality of raising venture capital for technology-based businesses.
It was impressed by the market opportunity - it estimated global sales of $60 billion for finished short-run printed products, mostly done on offset printers - and a product with a "clear technological lead in addressing that market."
The result was a $28 million private placement to pay for an expanded factory at Mortsel, Belgium, which opened in April 1994.
De Schamphelaere's confidence was rewarded. By December 1995, the company had shipped 367 DCP-1 machines. Revenues jumped from $20.77 million in 1994 to $81.12 million in 1995. Xeikon made a net loss of $6.51 million in 1994, but a net profit last year of $710,000. In the same period, total assets increased from $46.68 million to $81.54 million.
A key to success has been to exploit its core expertise - development and manufacture of one crucial component - leaving other functions to third parties. It produces only the digital print units themselves, which follow one of two routes to market:
First, they can be sold under Xeikon's name by 32 "value-added distributors," which integrate them into the end-user's desktop publishing software and hardware. Alternatively, they are sold under "original equipment manufacturer" agreements to Agfa-Gevaert and IBM, which integrate them into their own printing systems, called the Chromapress and IBM 3070 respectively. These OEM customers accounted for 59 percent of revenues last year.
Xeikon therefore avoided the costs of setting up a large sales force. "Consumables" connected with the product, such as toner cartridges, developers and specialised parts, are also manufactured by third parties, including Agfa.
This year's flotation provided $13 million to repay short-term working capital debts, and a vital $11 million to fund expanded manufacturing facilities and R&D.
It also made handsome returns for investors in the 1994 private placement. For example, Electra Fleming, the investment management company, paid $3.2 million for 805,000 shares in 1994. It sold 241,500 shares into this year's offering, raising $3.6 million. Its remaining 2 percent stake in Xeikon is valued at close to $6 million even after June's share price fall.
Last month it became apparent that orders were not meeting expectations. Introduction of an updated product, the DCP-32, had taken orders away from the older model to a greater extent than expected, while launches by Xerox and Scitex had also had an impact.
Xeikon had no choice but to warn investors.
"Although in principle I believe the market is always right, we think there was an over-reaction," says Blanpain. "We knew this kind of accident can occur on Nasdaq. But we thought it was better to be absolutely honest rather than gain a reputation for not being straight with people."
He says Xeikon will improve its communications program to ensure that analysts and investors are kept informed about developments and that their forecasts are not over-optimistic.
Xeikon also will increase its marketing efforts, targeting new sorts of customers. Most now are commercial print shops using Xeikon's product to print items such as catalogues, marketing brochures, direct mailings and newsletters.
But Blanpain says the marketing departments of large and medium-sized companies, for example, could find the machine cost-effective for short runs of promotional material which could be altered from day to day or week to week - extremely expensive to print using older offset technology.
"Nothing in the fundamentals of the company has changed," he says. "We have a new and improved product. And we have learned the rules of the game."