Obsolescence is the ultimate fate for practically every piece of technology -- the question is just how fast oblivion comes on. And while Imation (NYSE:IMN) is focused on markets that are admittedly mature, there's a profitable gulf between "mature" and "dead."
In my view, first-quarter results speak to both the potential and risks with Imation's business. Revenue was up 6% as the company saw a 15% increase in volume and a 6% decline in pricing, with the remainder being a negative currency effect. So at a basic level, 15% improvement in volume tells you that there are still people out there buying optical discs, tape cartridges, and so on.
Profitability was a bit more mixed. The gross margin fell because of the product mix (more optical and flash products), and though reported operating income was lower than in the year-ago period, adjusting for stock-comp expense and restructuring does ultimately produce 5% growth. More impressively, operating cash flow for the quarter was quite solid compared with the year-ago quarter.
The key for Imation is profitable market share growth -- with a business model that is all about selling the razor blades and not the razors, market share is key. And luckily, it has solid relationships with customers like IBM (NYSE:IBM), Sun Microsystems (NASDAQ:SUNW), Dell (NASDAQ:DELL), and Hewlett-Packard (NYSE:HPQ). And good customers are important when you have to deal with Fuji in the large-company market, Sony (NYSE:SNE) in the smaller business market, and companies like SanDisk (NASDAQ:SNDK) in the home-use market.
Let's circle back to the obsolescence question for a moment. While it may seem strange to some, many companies still like to keep backup records and data stored on tape. And despite the rise of flash drives and iPods, there remain plenty of folks burning CDs and DVDs to store information. So again, there's still a real market here, so long as the company can stay focused on profitable growth and cash generation.
Since you don't have a fast-growing market to bail you out, you've really got to buy a stock like Imation right. Of course, $15 a share in cash and no debt certainly helps the valuation. And while the stock today seems like just a moderate bargain, I think the addition of Memorex may favorably tip the balance. Of course, it's the responsibility of all Fools to do their own research and decide for themselves.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
