Drive Electronics Drive

The announcement this week of the sale of print-head drive electronics manufacturer TTP Meteor to software vendor Global Graphics (Euronext: GLOG) has cast a rare spotlight onto an often-unappreciated corner of the inkjet market. Meteor Inkjet, as the new subsidiary will now be known, was formed 10 years ago, one of many technology businesses nurtured by ‘The Technology Partnership’ (TTP), a Cambridge, UK-based incubator.

In inkjet printing, the focus – understandably – tends to be on the print-heads and the ink. But spare a thought for the “datapath”: the circuitry that translates the bits and bytes of stored data in a ‘page description language’ like Postscript™ into instructions to fire drops of ink from an array of nozzles. This is the demanding task of the drive electronics part of a print engine. A print-head array in a single-pass inkjet printer might contain 100 or more printheads, each with 1,000 or more nozzles firing tens of thousands of drops per second. This means that data-rates of many gigabits/second have to be fed to the amplifiers that create the voltage pulses to eject ink drops. These voltage pulses, sometimes as high as 100 volts and switching in micro-seconds, create electrical noise in what is already a noisy environment, with motors, controllers and fluorescent lights all contributing to the electrical cacophony. A single glitch can cause a visible print defect. Good design, not only of the circuit boards, but also of the cables, shielding and grounding systems, is critical. This is the (relatively rare) expertise of Meteor and its competitors.

Who are these competitors? There are several distant ones: of similar scale are China-based Amica, and the Russian/Swiss DPS-Innovations; and the gorilla in the field is California-based Electronics For Imaging (NASDAQ: EFII), founded eponymously by Efi Arazi in 1989. But the nearest competitor to Meteor, both geographically and in market terms, is Global Inkjet Systems (G.I.S.), also based in Cambridge. G.I.S. is younger than Meteor and is privately-held, so revenue and customer data are unavailable (the OEM customers of both companies tend to be secretive about what is inside their printers), but G.I.S. is widely believed to have accelerated past Meteor in terms of market share. The reason in part is that G.I.S. offers a turnkey sub-system that includes the software needed to make a production printer work, in addition to the electronics. This includes a Raster Image Processor (‘RIP’) to turn a PDF or image file into a bitmap; color management; and Variable Data Printing (‘VDP’) software. Meteor had only an ‘SDK’ (software development kit) that allowed customers to plug-in their own RIP, color management and workflow software.

The acquisition by Global Graphics changes this situation and the marketing dynamic. GLOG, which owns and licenses the Harlequin and JAWS Postscript RIPs, can supply all the software that Meteor was previously lacking, together with well-established expertise in color management and high-speed document printing. So, from the Meteor point of view, the acquisition looks highly synergistic.

From TTP’s perspective, the company has sold a portfolio company that, I surmise, has not met growth and profitability expectations. According to the numbers provided in the press release, GLOG paid £1.2m in cash, plus deferred cash compensation of up to £3.6m over ten (!) years. Depending on cost of capital, this equates to a maximum NPV of about £4m, or about nine times Meteor’s annualized 2016 earnings. For a technology company, this is hardly a rich valuation. (Near neighbor Xaar plc, for example, trades at a P/E of about 20, and GLOG’s own P/E is over 100. It is also worth noting that Meteor lost money in 2015 – more on this in a moment.)

From GLOG’s perspective, the publicly-traded company has bought a Meteor customer base to which it can sell its RIP software and ‘Fundamentals’ print consulting services, and a hardware partner that allows it to offer turnkey datapath solutions to its licensees. These include big names like OKI, Casio and Roland. The acquisition, albeit at what looks like a very reasonable price, cost it over one third of the cash on its balance sheet. GLOG would probably have preferred to use its stock as currency (its share price has gone up 50% in the last 3 months), but in these uncertain post-Brexit times, TTP evidently preferred cash to a thinly-traded European stock.

A final point: GLOG, in common with most software companies, enjoys gross margins in the 90% range. It will have to get used to the fact that hardware companies are less profitable than this, and often have higher fixed costs. If we look at the delta between Meteor’s reported 2015 revenues and profit, and the annualized 2016 values, we see that revenues increased by about £1.25m and the bottom line increased by £0.5m. Assuming no change in fixed costs, this implies a contribution margin of 40%. This is probably in line with the other suppliers of drive electronics, but GLOG’s management will want to be sure that its acquisition is accretive to earnings, and delivers both the corporate growth and the 10-year earn-out that it expects.
From the perspective of their customers, the acquisition of Meteor by Global Graphics provides expertise and more assurance that their printers can achieve the print performance and reliability expected. For the industrial inkjet industry as a whole, this marks a step towards maturity.