LEXMARK FACING QUESTIONS ON LASERS

[Anonymous]

Lexmark facing questions on lasers
Division profit falls, expenses rise for now
Lexmark International’s laser printer business, which has increasingly propped up the company in recent years, came under closer scrutiny Tuesday as analysts asked about its climbing expenses.Their conversations with management came as Lexmark announced first-quarter earnings that exceeded expectations but continued to show a trend for laser: revenue is climbing but profit is falling.In the first quarter, revenue rose 1 percent for the division, but income fell 7 percent. And the quarter also saw another trend continue — shipments of laser printers fell, just as they have in all but one of the last five quarters.

Lexmark says it’s shipping the products that matter — higher-end printers whose owners print more pages and use more toner.Lexmark’s real profit lies in toner sales. It noted that sales of color laser products were up in the double-digit percentage range in the first quarter.”They’re getting into the growth portion of the market,” acknowledged Larry Jamieson of industry tracker Lyra Research. “But … at some point, revenue has to kick in a bit better.”

While Lexmark’s inkjet division has struggled in recent years, laser has chugged on.
The segment saw its revenue increase 3 percent year-over-year in 2006, and 5 percent year-over-year in 2007.But when excluding certain restructuring charges, operating income, or the division’s profit, fell 5 percent and 2 percent, respectively, in those years. And the first quarter’s operating income for laser was down 7 percent.Executives said the division’s expenses have increased because of a strong investment in research and development, as well as spending for a larger sales force to help sell a broad portfolio of products.”We feel like the business, in terms of the product and the offerings that we have, is very well-positioned and the best positioned it’s been in a long time,” said Chief Financial Officer John Gamble Jr.But the question now is: How long does it take until the investment pays off with revenue growth that outpaces expense growth?”Over the next year or two, they’re trying to achieve critical mass,” said Tom Carpenter, vice president and senior equity analyst at Hilliard Lyons in Louisville. “They’re still making good money in that business.”

Gamble declined to discuss how soon Lexmark envisions such a critical mass being achieved.
Carpenter said the company’s odds of succeeding are greater in the laser division than in the struggling inkjet division, which saw inkjet shipments drop 42 percent year-over-year in the quarter.”They have a higher brand image in (laser) than they do in inkjet,” he said.With inkjet’s well-publicized struggles, Jamieson said, it’s possible that could weigh on some laser buyers’ minds.”The difficulty is where they don’t know Lexmark, and particularly in some of the smaller businesses,” Jamieson said. “If all they know are Lexmark low-end inkjet printers, they might equate the Lexmark laser printers with the Lexmark inkjet printers, and that would have a definite negative effect.”

Revenue
1st quarter 2008: $1.18 billion.
1st quarter ’07: $1.26 billion.
Earnings
1st quarter ’08: $101.7 million.
1st quarter ’07: $92.4 million.
Earnings per share
1st quarter ’08: $1.07. Would have been $1.16, excluding 9 cents a share for restructuring.
1st quarter ’07: 95 cents. Would have been 96 cents excluding 1 cent a share for restructuring.

Behind the earnings
First-quarter 2008 profit increased despite a revenue decline, as the company benefited from selling fewer inkjet printers. Those printers are typically sold at a loss, with ink cartridges later bringing the profits. The company’s laser printer division saw a 1 percent increase in revenue, though its operating income fell 7 percent year-over-year.

Looking forward
The company said it expects second-quarter revenue to decline in the mid-single-digit percentage range year-over-year. It forecast second-quarter earnings per share to be 54 cents to 64 cents. Excluding restructuring charges, it expects earnings of 65 cents to 75 cents per share.

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April 23, 2008 at 1:41 PM