ENCAD, Incorporated History

Address:

6059 Cornerstone Court West
San Diego, California 92121
U.S.A.

Telephone: (619) 452-0882
Toll Free: 888-436-2347
Fax: (619) 452-0891

Public Company
Incorporated: 1981
Employees: 455
Sales: $149.04 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: ENCD
SICs: 3577 Computer Peripheral Equipment, Not Elsewhere Classified

Company Perspectives:

Our strategy for future growth is to focus on select high-growth markets. We are targeting the signage and textile markets, and may target other high-growth markets in the future. Within the signage and textile markets, we plan to add products with greater productivity and more value-added, technology-driven features. Our goal is to continue setting new quality and productivity standards as a leader in our targeted markets and to grow ENCAD into a large and highly profitable company. Today, ENCAD offers the best products in the markets we serve, and we plan to continue to offer our customers exciting new imaging products and technologies. We also have in place one of the strongest distribution networks in the industry, and we benefit from the support of more independent software vendors than any of our competitors. Our management team has a well-defined long-term growth strategy and has demonstrated an ability to rapidly innovate and implement strategic initiatives for growth.

Company History:

ENCAD, Incorporated is an innovator and market leader in the field of wide-format computer inkjet printers. ENCAD's printers produce high-quality color images on a variety of surfaces for use in the computer-aided design, graphic arts, sign-making, and fashion industries. With distribution to over 67 countries, exclusive manufacturing arrangements with major corporations such as Xerox and Eastman Kodak, and a history of technical leadership, the company is in a strong position to defend its turf against aggressive competition from industry giant Hewlett-Packard.

Beginnings

ENCAD was founded in 1981 by David Purcell and two partners as a maker of pen-plotter printers, devices that were used to print computer-generated images such as blueprints and industrial designs. Purcell had been involved in the formation of several businesses since 1969, the first of which was Celtec, a firm that represented technical manufacturers. In 1976, Purcell cofounded a capacitor manufacturing business, Bishop Electronics, and several years later participated in the formation of Ryno Electronics, a chip distributor. ENCAD was initially run out of Purcell's home. The new company's first product was introduced in 1982, a pen-plotter printer that featured several improvements over existing designs. ENCAD cofounder Richard Murray, who had worked for several years at Hewlett-Packard, was the company's chief technical officer, and oversaw the creation of its new products. While sales were respectable at first, the company had strong competition from the much larger Hewlett-Packard, which controlled 70 percent of the market.

ENCAD's annual sales reached an early peak of $3 million for fiscal 1983, but a downturn soon followed, and the company was forced to reduce its personnel from 75 to 16. After struggling along for several more years, ENCAD developed a faster, cheaper, and sharper wide-format color pen-plotter, which kept the company alive, if not exactly thriving. During these early years, there were several times when the company appeared to be on the brink of collapse, but Purcell was able to come up with a last-minute strategy that managed to keep the wolf from the door. In early 1991 things looked particularly bleak, with the company being refused a loan of $600,000, which it needed to complete development of a new inkjet printer. Going against the advice of his board of directors, Purcell put up his own personal assets to keep the company alive. His faith in ENCAD paid off within months, however, when the company introduced the NovaJet printer. This newly designed wide-format inkjet printer was the first of its type on the market, and its low price and high-quality printing work made it an instant success. Compared to a pen-plotter device, the NovaJet offered higher-resolution images, a wider range of colors, and was as much as 20 times faster. Within a year ENCAD's annual sales had increased 253 percent, from under $5 million to nearly $15 million. The company's sales of pen-plotters, which had constituted over three-fourths of total revenues, dropped to less than a fifth of total sales.

1993: NovaJet II Introduced; Stock Offered on NASDAQ Exchange

In March 1993, less than two years after its first big leap in sales, ENCAD introduced its second-generation version of the NovaJet design. While the original NovaJet had been a significant improvement over pen-plotters, it had still not been able to render photographic images with precision. The new version offered a distinct improvement in this area, with 300 by 300 dot-per-inch (dpi) resolution and streak-free printouts of photographs. The response from buyers was immediate, with users in the graphic arts enthusiastically joining ENCAD's clientele, which already included computer-aided designers such as engineers, architects, surveyors, and map-makers. ENCAD's product line at this time included 36- and 48-inch wide NovaJet printers, and three models of pen-plotters.

Chief competitor Hewlett-Packard, which had been caught off-guard by ENCAD's release of the first NovaJet, introduced its own wide-format inkjet printer in May 1993, and soon gobbled up a majority of the market. Fortunately for ENCAD, sales of wide-format printers were increasing exponentially, and the company did not suffer greatly from this competition. The company's sales had for some time been expanding to overseas markets, with some half of revenues coming from abroad by the start of the 1990s. Over the next few years ENCAD would open sales offices in several important foreign business regions. ENCAD products were being sold through a growing network of over 60 distributors, who supplied hundreds of resellers internationally.

ENCAD's stock was first offered on the NASDAQ exchange in December 1993. The offering was a success, with the price surging over the next several years. At around this time ENCAD began signing a series of "Original Equipment Manufacturer" (OEM) agreements with different companies, starting with LaserMaster and continuing on to Japanese printer manufacturer GraphTec. This type of agreement allowed ENCAD to manufacture specific versions of its products for other companies, who would sell the product under their own brand names. Within several years printers produced under OEM agreements would comprise a quarter of the company's sales. Another increasing source of revenue for ENCAD was "consumables," or inks and special printing media (such as paper rolls) that were used by owners of its printers. In 1993 this accounted for only five percent of revenues, but the figure grew to eight percent by 1996 and was expected to reach 20 percent in 1998.

As the success of its products gave ENCAD a reputation for quality, it was able to introduce other lines of printers to sell to different segments of the market. The lower-priced CADJet line was introduced in 1994. One of the primary selling points of all ENCAD products, including the NovaJet line, had been affordability. For many of its customers, the NovaJet printer allowed the convenience of doing work in-house that had previously been farmed out to print shops that owned expensive large-format electrostatic or thermal printing equipment. The NovaJet printers were low enough in price to be affordable (costing between $6,000 and $17,000, depending on size and other factors), and their ability to eliminate turnaround times of up to several days was extremely useful to time-dependent customers such as advertising agencies or presentation graphics designers.

ENCAD manufactured its printers using outside companies, who did the injection molding and steel fabrication. The final assembly and testing was done by ENCAD, with the design of products also handled in-house. Hewlett-Packard was one of the companies that ENCAD purchased components from, and this led to the first of several lawsuits initiated by the larger concern against ENCAD. A claim that the company was violating a patent used to produce a metal encoder strip was settled in early 1995, with ENCAD agreeing to make royalty payments. The newer models of NovaJet printers had already been designed around this part, so the problem was not a major one for the company. In mid-1995 an OEM agreement with Xerox was announced, with Xerox to use NovaJet printers as components of products to be sold under the Xerox name. ENCAD's annual sales were growing by leaps and bounds, reaching $65.5 million in 1995 and $107.4 million in 1996, with profits exceeding 10 percent of those figures each year.

1996: Innovative Outdoor Printing Systems Introduced

In addition to signing OEM agreements, ENCAD was also working with other outside companies to come up with ideas for new products. After several years of experimentation, in 1996 the company announced that DuPont had developed newly formulated inks that could be used outdoors, and, with a special coating, would withstand years of exposure to the fading powers of the sun. This brought a significant number of new customers to the company, as sign-making companies snapped up ENCAD products. An OEM agreement with the Japanese GraphTec company led to the development of a specialized printer that could dispense durable inks onto a vinyl surface, then cut the vinyl with great precision, creating another innovative new application for sign makers.

Early in 1997, ENCAD introduced its largest wide-format printer yet, the 60-inch NovaJet PROe model. The company had for some time commanded the majority of the graphic arts wide-format printer market, as its reputation for quality and innovation was widely known. ENCAD also signed an OEM agreement with Kodak to produce some of the new printers to be sold under the Kodak name as part of a specially customized, full-featured imaging system. The new OEM agreement added more fuel to the company's rivalry with Hewlett-Packard, as the larger company had been dumped as Kodak's supplier of wide-format printers in the process. Although sales in ENCAD's Asian markets had experienced a sharp decline for several years running, the company posted another record year for 1997, with $149 million in sales, profits again amounting to more than ten percent of that figure.

While Hewlett-Packard continued to dominate the overall market that ENCAD was a part of, its sights were still set on weakening or eliminating its competitor. Several other patent infringements were claimed, though these were dismissed in August 1997. The larger company (its annual sales amounted to some $38.4 billion in 1996) had the resources to sell its products at a rock-bottom price, which forced ENCAD to cut its own prices (and profits) to compete. Hewlett-Packard also started a trade-in program, offering generous allowances to customers who brought in an ENCAD printer when purchasing a new Hewlett-Packard model. By late 1997 Hewlett-Packard had surpassed ENCAD in sales to the graphic arts market for the first time.

ENCAD continued to introduce innovative products, however, countering the attacks of its competitor by creating new markets for itself. In the spring of 1998 the company introduced an inkjet printer that could print high-resolution images directly onto specially coated fabrics, a concept that appealed greatly to the fashion industry. The standard method of testing new fabric patterns was expensive and could take six to eight weeks, but the ENCAD Digital Textile System offered same-day turnaround. Sales were expected to be brisk, perhaps even surpassing those of the company's previous products within several years. The NovaJet PRO 600e printer was also announced. This latest update of the NovaJet series was ENCAD's first printer with 600 by 600 dpi resolution.

Having gone from being a small, continually struggling concern during the 1980s to a major player in the wide-format printer market of the late 1990s, the success of ENCAD showed that the perseverance of its founders and the company's innovative designs could win it a significant market share despite the efforts of the Goliath-like Hewlett-Packard to vanquish it. Its continued success would likely depend on those same factors, as the competition for market share continued unabated. With the frequent introduction of new products that were likely to find wide acceptance within their target markets, it appeared that the company would hold its own for some time to come.

ENCAD, Incorporated History

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