Printer device firm turns page as market shifts force change. (Corporate Focus).

THE technology free-fall has led Peerless Systems Corp. back to the drawing board.

These days, the El Segundo-based company, which makes imaging system components for office equipment like printers, copiers and scanners, no longer focuses on selling to the largest manufacturers of these products.

Those manufacturers, including Xerox Corp. and Japan's Canon Inc., sharply cut back on spending to suppliers like Peerless a few years ago. Not surprisingly, revenues fell 35 percent, to $27.4 million, for the year ended Jan. 31, 2001. Peerless lost $17.6 million after earning $3.4 million in the previous fiscal year.

It responded by raising software fees and selling off an unprofitable unit -- moves that allowed it to break even in the year ended Jan. 31, 2003. The new strategy involves selling to lower-tier manufacturers and to the distributors of those products.

These distribution channels, while potentially lucrative, are already competitive and will test the company's ability to quickly produce cutting edge technology.

"The last two years we've been in catch-up mode. The only way to compete is to create something the others don't have," said Chief Executive Howard Nellor.

Imaging technology controls the processing of digital text and graphics and functions such as printer speed and quality. Office printing networks rely heavily on this combination of imaging software and electronics, collectively known as controllers.

Peerless has renewed its focus on controller technology since it brought in new management three years ago and shed an unprofitable network storage unit in January.

"They were more focused on their other businesses than their core technology," said Robert Palmer, an analyst at Lyra Research, a Boston research firm.

'Turnkey' heritage

Founded in 1982, Peerless relied through the 1990s on monochrome (single color) laser printing software and chip sets. A good part of the business involved "turnkey" solutions that included software licensing, controller design and engineering services. The turnkey business has declined substantially since 2000, according to company filings with the Securities and Exchange Commission.

In 1999, Canon decided to develop its imaging controllers internally to cut costs. Since then, Peerless has been raising licensing fees while scrambling to find other sales avenues.

The company now generates most of its revenue from licensing such software. After the loss of Canon, Peerless slowed its internal software development and now depends on reselling imaging software made by Adobe Corp., forfeiting a substantial portion of revenues.

Peerless is trying to wean itself from Adobe by turning to the emerging color laser market, estimated to grow at more than 20 percent per year through 2006, according research firm International Data Corp.

The color software architecture will be aimed at printers and multifunctional imaging products that can produce copies, scan images and perform other functions.

Peerless has yet to complete any deals for its color imaging products, said Kathleen Buczko, a company spokeswoman.

One new sales channel will be distributors that carry name brand products from hundreds of manufacturers. The company is aiming to sell to the distribution arms of Canon, Sharp Corp. and Ikon Office Solutions Inc., all of which operate independently from their manufacturing counterparts in Japan.

"They will bolt our controllers on the printers. This is an alternative that was previously unavailable to us:' said Nellor.

Some analysts question whether the company can provide the required support to these distributors, who require training and documentation. For Peerless, this will mean more time and investment, with a goal of getting distributors to swap out the manufacturer's imaging controller for a Peerless design.

"It will require a stepped-up level of support from Peerless," said Chris Le Toq, an analyst at Guernsey Research.

Peerless has conducted field tests for two years to determine which features companies want in their networks. Competitor Electronics For Imaging Inc. has had success with a similar plan. Smaller controller manufacturers will also provide competition.

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YEAR (Jan. 31)                       2003     2002

Revenue (millions)                  $31.8    $29.8
Total Expenses (millions)            31.5     39.7
Operating Income (Loss) (millions)    0.2    (9.9)
Net Income (Loss) (millions)          0.1     (11)
Earnings (Loss) Per Share           $0.01  $(0.73)

RELATED ARTICLE: SUMMARY

Business: Imaging and networking technology

Headquarters: El Segundo 

CEO: Howard Nellor

Market Cap: $23.4 million

Dividend Yield: N/A *

Total Liabilities: $7.9 million

P/E Ratio: 150

Long-Term Debt: $0

* Peerless Systems does not pay dividends.