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 user 2005-10-27 at 12:16:00 pm Views: 66
  • #14394

    Where’s Lexmark headed?
    executives cut their third-quarter earnings forecast by more than half
    earlier this month, stockholders abandoned the company in droves,
    dropping the share price more than 28 percent in one day.
    Tuesday, executives of the Lexington-based printer maker will release
    third-quarter earnings and provide guidance for the future, which
    analysts hope will reveal whether recent setbacks were an aberration or
    a sign of things to come.
    Analysts identified several key areas to watch in the months ahead. They include:

    • Consumer demand for Lexmark inkjet printers and supplies.
    • Concerns that inkjets’ lifespans are shortening.
    • Lexmark’s relationship with Dell, for whom it manufactures printers that are sold under Dell’s name.

    Demanding times
    his Oct. 4 conference call with analysts, CEO Paul Curlander revised
    third-quarter earnings from a predicted range of 95 cents to $1.05 per
    share to 40 to 50 cents.
    He said part of the company’s woes came
    from lower than anticipated sales of supplies, such as ink, and of
    Lexmark-branded printers, which were down year-to-year.
    printers” are printers sold with the Lexmark logo, in contrast to
    printers Lexmark makes for companies such as Dell that are sold under
    the other company’s name.
    Compounding the problems was a series of
    price cuts on printers, ranging from 7 percent to 30 percent, to stay
    competitive with the company’s rivals.
    Though Curlander said printer
    sales increased late in the quarter, analysts said the price cuts will
    not be enough to boost the company’s waning market share. Lexmark held
    13.9 percent of the U.S. market share of printers and multifunction
    printing devices in the first half of 2005, down from 16.2 percent in
    the first half of 2004, according to market analyst IDC.
    Analysts said Lexmark’s image adds to the problem.
    Cowen & Co. Managing Director Richard Chu said Lexmark has
    historically built its printer business around price instead of
    quality, though it has focused lately on more upscale products.
    you have to do is walk into a store” he said. “I don’t think the
    typical consumer walks to the Lexmark product saying, ‘I’ve got to have
    this.’ If he’s looking for price, he may gravitate towards there.”
    Lyons Senior Technology Analyst Tom Carpenter said the problem is most
    noticeable at electronics retailers such as Best Buy.
    tends to do fine in the Wal-Marts, the Meijers and the Targets,” he
    said, “but in the stores where … there’s a salesperson there and they
    have some influence with the purchase decision, it seems like it would
    pay off for the salespeople to have a favorable impression of Lexmark
    products. They have no one visiting them and going over the product and
    the features and explaining why it’s better than the competition.”
    Lexmark officials would not comment about any of these issues before Tuesday’s announcement.
    while Lexmark aims to bump up its share of the market with the price
    drops, Chu said the cuts are indicative of a larger problem with the
    printer industry’s business model.
    On a razor’s edge
    Referred to
    as a razorblades model, printer companies, like razor manufacturers
    Gillette or Schick, charge little or nothing for their initial product
    – the razor or the printer — and then make their profit by charging
    higher prices for supplies for the initial product — blades, ink and
    But if sales of supplies dwindle, the model becomes broken, which Carpenter said has already happened.
    could once rely on consumers to buy multiple ink cartridges over the
    lifetime of a product, offsetting the losses on the sale of the
    low-price printer. But with printers — which typically are packaged
    with ink cartridges — even cheaper than before, consumers may be
    buying new models more frequently.
    In the recent conference call,
    Curlander said the drop in supplies sales could very well be due to a
    shorter printer lifetime, but he said Lexmark had no firm data to
    support one theory over any other.
    Chu said Dell’s practice of
    bundling some Lexmark-produced inkjet printers with PCs may have
    created a base of users that actually don’t use the printer.
    In some
    cases, Dell has given away free inkjet printers with computer packages
    “to somebody who had no intention of buying a printer.”
    Even though
    Lexmark’s installed base of customers grows larger, “in some cases (the
    printer) doesn’t do much printing or it never gets opened, so it
    doesn’t generate the required supplies,” Chu said.
    Carpenter uses himself as an example.
    had my Dell/Lexmark printer for almost two years, and I have not
    replaced the toner cartridge,” he said of his home printer. “I would
    just go buy a new printer. … If you spend almost $30 on a replacement
    cartridge, why not go and buy a $40 or $50 printer?”
    Chu said
    Lexmark’s potential could lie with laser printers, which sell for
    higher margins up front and also have highly profitable toner
    cartridges and supplies.
    When combining inkjet and laser printer
    sales, Lexmark controlled just over 10 percent of the worldwide market
    share in the first quarter of 2005, according to IDC, compared with
    printer giant Hewlett-Packard’s 40 percent
    “If you sell a corporate
    laser, whether it’s through Dell or by yourself, chances are pretty
    good it will pump away consumables predictably for a number of years,”
    Chu said. “That certainty is not there with consumer inkjets.”
    With that prospect, he said Lexmark should consider shifting course.
    may be blasphemous to contemplate this, but Lexmark should consider
    whether it should even have an inkjet business,” Chu said. “I doubt
    that they’ll agree with that.”

    Dump Dell?
    Carpenter, of
    Hilliard Lyons, advocated in a report to investors that Lexmark should
    fundamentally change its relationship with Dell, which accounted for
    more than 10 percent of the company’s revenues last year.
    He went as far as to suggest it may want to sever ties.
    Dell is offering your printer at lower prices with the Dell badge,
    which has a more trusted name, the value brand is being taken away from
    you,” Carpenter said.
    At the very least, Carpenter said, Lexmark
    should change its pricing agreement with Dell. Though the terms of the
    agreement are not discussed by executives, Carpenter said Lexmark
    should receive more money from Dell for both the hardware and the first
    or second replacement cartridge to offset potential losses from users
    who don’t frequently print. Once printer owners have ordered more
    replacements, Lexmark can offer higher discounts to Dell.
    the Dell relationship could be important to the long term, Chu said,
    should the PC maker begin selling more Lexmark laser printers.
    UBS analyst Ben Reitzes said in a recent report he believes Dell is
    purposely shifting its mix toward lasers produced by Samsung and Fuji
    Cross Research Managing Director Shannon Cross said there is
    also potential Dell may expand its partnership with Kodak, leaving
    Lexmark less and less important to the company.
    Lexmark’s future
    Curlander, during the conference call, said the same factors that troubled Lexmark’s third quarter may continue into the fourth.
    In the short-term, analysts predict it will be difficult for Lexmark to turn around its market share dilemma.
    not a one-quarter fix,” Carpenter said. “They’ve got to figure out what
    they stand for going forward or Dell is just going to keep taking share
    from everybody using their printers.”