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http://www.forbes.com/sites/greatspeculations/2015/09/09/lexmark-printer-business-to-suffer-in-h2-2015-despite-growth-in-mps/
Lexmark's Printer Business Earnings To Go Down In H2 2015
Lexmark International has been focusing on building its end-to-end solutions company with emphasis on Electronic Content Management and Business Process Management. However, its printer hardware and supplies business generates most of the cash, and makes up 83% of its estimated value. Due to the secular downtrend in the printer hardware market, its printer business has suffered with stagnant perfromance. Furthermore, intense price competition from OEMs and cheap supplies from independent suppliers, who offer counterfeit/re-manufactured cartridge and refills at lower prices, has affected its printer and supplies revenues. We believe that these trends will continue in second half of 2015 and the company will continue to report a decline in printer revenues. Additionally, Managed Printer Services, which form 22% of printer business, might not be able to offset the decline in overall revenues. In this note, we explore these factors in detail.According to IDC, the worldwide hardcopy peripherals market shipment declined by 6% in Q2 2015. The trend indicates that demand for both inkjet and laser printers faltered in Q2, as was the case in Q1. However, the decline in demand for laser printer in both Multi-Function printer and single function format was steeper than the industry. While the single function laser printer market declined by 14.4% year over year in the second quarter, MFP shipments decreased by 6.6%.
In order to compensate for the fall in printer units, and to increase their market share, many hardware manufacturers, especially Japanese manufacturers, have cut the prices on their printers. This was reflected in the Q2 numbers reported by IDC. IDC reported “Epson outperformed all other vendors for the second quarter in a row, with continuous success in the inkjet segment. Most of Epson’s growth came from the United States and Asia/Pacific (excluding Japan)(APeJ).” ((Worldwide Hardcopy Peripherals Market Declines Nearly 6% in the Second Quarter of 2015, August 24 2015, http://www.idc.com)) Most of the Japanese OEMs have their manufacturing units in China, and this gives them the leverage to under cut competition on price.
Lexmark’s manufacturing operations for laser printer supplies are located in Boulder, Colorado; Juarez, Mexico; Zary, Poland; and Shenzhen, China. According to Lekmark’s 10-K fillings, most of its laser printer cartridges are assembled by a combination of in-house and third-party contract manufacturing, and the manufacturing control center for laser printer supplies is located in Geneva, Switzerland. [2] Considering that the company relies on third party vendors and its facilities located in the Americas and Europe, we believe that Lexmark might not be able to compete with other player on price. Therefore, we believe that it will continue to struggle behind bigger players such as HP and Epson. Furthermore, it is extensively focusing on the A4 (paper format) printer segment that forms 77% of total printer sales and witnessed marginal growth of 0.6% year-over-year growth in the second quarter. While the laser printer market has declined to 8.8 million in Q2, we estimate that Lexmark’s push in the sub-segment will result in improvement in its market share by 10 basis points to 4.61% by 2022.
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