LEXMARK FORECAST SCARES OFF INVESTORS

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LEXMARK Forecast scares off investors
Lexmark International announced fourth-quarter earnings yesterday that exceeded Wall Street’s expectations. But muted forecasts for the first quarter of 2007 led investors to sell off the stock, dropping its price more than 5 percent over the day.The turbulent day for the stock price paralleled a rather turbulent year for Lexmark, as it has sought to restructure its business after entering a slump in the latter half of 2005.”I believe we made good progress last year,” Lexmark CEO Paul Curlander told analysts yesterday morning during a conference call.Curlander emphasized the company’s laser printer business, which saw unit sales increase 15 percent in the fourth quarter of 2006 and included strong performance in key growth segments like color lasers and laser multi-function printers. The laser segment also drove growth of supplies such as ink and toner to a 4 percent increase year-over-year in the fourth quarter.But Curlander warned that the laser supplies growth was more than Lexmark internally predicted and would probably not be repeated in the first quarter of 2007.He went on to forecast that Lexmark’s supplies revenue, including both laser and inkjet, would decline rather than grow in the first quarter of 2007, compared to a year earlier.It was a forecast that prompted multiple questions from analysts, and was probably the engineer behind the falling stock price, said Tom Carpenter, a vice president and senior equity analyst at Hilliard Lyons in Louisville.”If supplies are down like their forecast, that could be an issue on their margins and earnings throughout the year,” said Carpenter, whose firm or its affiliates beneficially own at least 1 percent of Lexmark’s stock.Lexmark executives said the forecast for declining supplies revenue stems from the company’s inkjet business, which has recovered more slowly than its laser business.in the fourth quarter, the inkjet segment’s revenue was down 11 percent year-over-year. For the year, its revenues were down 8 percent.By contrast, Lexmark’s laser printer segment saw its revenue increase 11 percent in the fourth-quarter compared to a year ago. For 2006, its revenue was up 3 percent.The weakness in the inkjet segment comes as the company walks away from a portion of its inkjet sales, primarily bundles in which its printers were either given away or sold at little cost to consumers who did not buy enough ink and supplies over the life of the printers to meet profit expectations.Lexmark Chief Financial Officer John Gamble Jr. said the company’s hope is that by eliminating the printers whose users don’t print enough and focusing on selling more all-in-ones, which typically print more, the inkjet business will thrive.Gamble said the company did see an increase in the sale of all-in-ones, which generally have scanning, copying and faxing functions, in the fourth quarter.The company does not forecast past the first quarter, so executives declined to discuss how long the exit from bundles could affect supplies revenue.Carpenter said he expects the move to have run its course by 2008.The withdrawal was part of the reason yesterday, though, for Lexmark’s forecast of declining supplies revenue.The other component is printers that Lexmark manufactures for other firms, which then sell them under their own brands. That OEM business, as it’s called, has been weak in recent quarters.But Carpenter noted that the company’s supplies revenue could be higher than it forecast.”Historically, Lexmark has always been very conservative in their guidance,” he said.He also noted that forecasting usage patterns can be difficult and Lexmark could wind up seeing more strength in laser supplies than they expect, which could offset inkjet weakness as it did in the fourth quarter.Since the company has been targeting product segments that tend to use more ink and toner, “maybe the usage patterns are different here,” Carpenter said.In the laser segment, the company has been focusing on selling more color laser printers, laser multi-function printers and low-end monolasers.Executives emphasized the newest lines have won a host of critical acclaim in 2006.”The reason we’re spending the R&D dollars and the development dollars is to do just that,” Gamble said. “It’s to drive the product quality and the print quality and the competitiveness of the products.”Curlander noted, however, that the company is still not where it wants to be.”We need to continue to invest and to improve in order to drive our long-term growth,” he told analysts.And that long-term growth depends on selling products that generate solid supplies sales, Carpenter said.”The business model depends more on supplies and the profits that they bring, and people are concerned in ’07 that if supplies growth does not pick up: Are they going to be able to grow their earnings year-over-year?” he said. “Wall Street rewards companies that grow their earnings year-over-year. Companies that don’t grow their earnings tend to get penalized.”

Lexmark 4Q profit up 9 percent
Inkjet and laser computer printer maker Lexmark International Inc. said Tuesday its fourth-quarter profit grew 9 percent as lower costs helped offset flat sales.Net income rose to $89.9 million, or 91 cents per share, from $82.3 million, or 71 cents per share, a year ago. Excluding restructuring related items, earnings per share would have totaled $1.05 in the latest period.Fourth-quarter revenue was $1.37 billion, about flat with last year.On average, analysts surveyed by Thomson Financial were looking for profit of 95 cents per share on sales of $1.38 billion.”Overall, this was a good quarter for Lexmark and we believe we are on course with our strategy,” said Chairman and Chief Executive Paul J. Curlander. “We saw strong branded unit growth in the quarter in our targeted growth segments of low-end monochrome lasers, color lasers, laser all-in-ones, and inkjet all-in-ones.”The company said adjusted gross profit margin totaled 31.1 percent, up from 28.3 percent in the same period last year, driven primarily by a change in mix between hardware and supplies.

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February 1, 2007 at 9:56 AM