Xaar has published its interim results for the first half of this year, with even more red than most of my old school reports, and which has prompted the company to give up on its thin film piezo printheads.
The headline figure is revenue of £22.5 million, down from the £35 million of last year’s first half. Doug Edwards, Xaar’s CEO, points out that last year’s first half figures included a one-time royalty payment from Seiko Instruments Inc of £9.7 million plus a £4.3 million revenue reversal over some 1201 printheads that were returned for refurbishment, meaning that the underlying revenues for this year’s results are actually a slight 1 percent improvement over last year, which is essentially arguing that this year’s first half isn’t so bad because last year’s period was worse than we thought at the time. In any case, the really bad news is actually in last month’s letter delaying this announcement, which cautioned that the second half performance would be roughly similar, meaning that the full year revenue is likely to be somewhere around £45 million, as opposed to the £63.5 million from the previous year.
From here on, it gets worse. The cost of sales rose dramatically from £16.25m to £25.1m, sales and marketing expenses were slightly up to £4.5m, while R&D spending was down but still accounted for £4.3m, and so on, leading to a gross loss of £13.2m.
And then there is the thin film business. Xaar announced alongside last year’s figures that it would need to find a strategic partner to work with in thin film to help spread the costs but having failed to find such a partner, the company announced a review of this business, and has now decided to mothball it. This adds a further £39m impairment charge to the first half figures, making a total loss before tax of £52.3m, or a loss of £49.87m after tax.
Edwards explains: “The issue was not the technology but if we continue to spend as we are then we will run out of money and the company will go under and so we don’t have any choice.” He continues: “We think that thin film is a winning technology but to play in thin film the level of investment required is substantial and for a company of our size it’s very substantial. We are competing with people who have spent 20 times what we have spent, so to come up with a product that’s competitive with the likes of Fujifilm and Epson is quite an achievement.”
Xaar’s core technology is making bulk film piezo printheads, which are extremely effective at jetting a range of viscous materials such as UV inks and various industrial fluids, including several 3D printing applications. Xaar had great success when the ceramics market adopted inkjet en masse, but has not managed to replicate this success in other markets, which became painfully obvious when the ceramic market reached saturation.
This has mostly been because Xaar did not have a printhead capable of jetting water-based fluids and so it set out to develop thin film technology to overcome this. Xaar’s thin film strategy was two-pronged, with its 1201 head designed to bring in money to fund development of the flagship 5601, and to spread the cost of the Silicon MEMs fabrication between the two heads. The 1201 was targeted specifically at Chinese printer vendors, who were looking for a relatively cheap printhead to keep their costs down. Ultimately, softening demand in the Chinese market has hit the sales of the 1201 and undermined the entire thin film project. Ironically, since part of Xaar’s financial problems come from having produced too many 1201 heads, the company is now confident that it has enough stock to supply its existing customers for many years. In any case, Xaar could use bulk film technology to satisfy this market so walking away from the 1201 isn’t such a problem.
However, losing the 5601 printhead does put Xaar in a very weak position. The biggest growth area in printing right now is the textile market, which is all about water-based inks. Similarly, all the printer vendors are betting that they can expand into the packaging market, and that they can develop water-based inks as part of this. Packaging can be split into two main types of substrates: paper-based packaging such as corrugated and folding carton, where we are already seeing a growing number of inkjet presses; and film-based materials, which is the subject of a great deal of R&D activity as vendors look to develop water-based inkjet inks and/or associated primers or coatings. Inevitably as this work bears fruit there will be more printing to film-based packaging, with this market likely to rival the growth in textiles.
Xaar took a gamble in pumping money into thin film, but it was a reasonable bet to take given the potential markets for water-based fluids and if it had come off then Xaar would have been in an extremely strong position. This is not just Xaar’s loss as the industry needs an independent player like Xaar.
Edwards says: “We don’t want to give up the aqueous market. It’s a major environmental and economic market in many applications so we can’t ignore it. But there’s still growth where perhaps water is not the solvent of choice like 3D printing where you are jetting a polymer or electronic component manufacture where you won’t want water, and some of them could be pretty big markets.”
Edwards points out that Xaar does still have a printhead capable of jetting aqueous inks, namely the 5501, which is a bulk piezo head developed as part of Xaar’s partnership with Xerox. Edwards says that the 5501 has a similar resolution and speed to the 5601, adding: “But we havn’t pushed it because all our focus had been on 5601.” However, the 5501, which was introduced two years ago, is mainly aimed at cheaper solutions such as wide format scanning printers, rather than the high end single pass production machines that the 5601 could also target.
Xaar could still license the thin film technology as it did in the early days with its bulk film printheads, with Edwards saying: “We are still looking at options for our thin film business because we think the technology is a winning technology but we have had to set a deadline.”
Edwards also says that Xaar could look at how it sells its heads, noting: “In the past we sold printheads to anybody that wanted to buy. We want to have much tighter relationships because we are just one of many suppliers with a handful of customers and there’s no loyalty.”
Edwards has also overseen Xaar moving into 3D printing with its High Speed Sintering technology and joint venture with Stratasys, as well as becoming an OEM and building printers in its own right through the acquisition of the US company Engineered Printing Solutions, which makes direct to object printers. Edwards says that Xaar will continue down the OEM route, noting that Xaar had to put any further acquistions on ice as the thin film investment consumed all the available resources. He adds: “Once we free up a bit of cash we will start to look again, particularly at the product printing area.”
Edwards also points out that despite the gloominess of these latest figures there are some small growth shoots, including 9 percent growth in sales to the ceramic market, as well as sales to the décor market, mainly for printing to glass, both of which use the 2001 bulk piezo printheads. Xaar has also had some success with its 1003 Advanced Manufacturing head in areas such as 3D printing and flat panel displays, and with its 501 head, mainly in the coding and marking sector. This is significant because of most of Xaar’s fixed costs are tied up in its manufacturing so making better use of its existing resources is a step in the right direction.
Nonetheless, it’s difficult to see Xaar enjoying the sort of growth and revenues that it did in the midst of the ceramic boom if it continues to miss out on the aqueous ink market unless it can find an alternative.
In the meantime, Xaar is clearly a takeover target though most of the companies that could afford it already have head technologies of their own. That said Xaar has a state of the art manufacturing facility and a stake in a 3D print technology. In addition, I believe that we will see much more growth in industrial printing and Xaar’s bulk film piezo printheads are a very good fit for this.
These disappointing figures will also lead to another bout of restructuring, which mainly involves job losses, with some 100 staff set to leave the company. Edwards himself is also leaving to return to his family back in the US. Shomit Kenkare has resigned as chief financial officer, despite having only taken up this job back in November 2018. The Chairman of the board, Robin Williams, is due to relinquish his role in March 2020 when the full year financial results are released. Andrew Herbert, a non-executive director, will take over as Chairman next year, while Margaret Rice-Jones, Senior Independent Director, will also leave in March.
Edwards will be succeded by John Mills, who joined Xaar in August 2019 as head of the Printhead Business Unit and will formally take over as CEO on 31 December 2019. Many readers may remember that Mills was previously CEO of another Cambridge-based inkjet company, Inca Digital, stepping down after five years in October 2018. Mills always struck me as having a very pragmatic attitude and his appointment should steady nerves amongst Xaar’s investors.