LEXMARK:MOVE TO CUT INKJET SALES =5% DROP

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Earnings forecast drops Lexmark shares 5%
Move to cut inkjet sales has impact
Shares of Lexmark International Inc. tumbled nearly 5 percent yesterday after the Lexington, Ky., printer maker said it would not earn as much as analysts had predicted during the final three months of the year.Lexmark announced stronger-than-expected third-quarter earnings yesterday, reporting net income of $85.6 million.But the earnings surprise was dampened by predictions that it would earn 80 to 90 cents per share during its fourth quarter, excluding restructuring costs.

Analysts polled by Thomson First Call had been predicting 91 cents per share.
Lexmark shares fell $3.09 to close at $59.94.Paul Curlander, Lexmark’s chairman and chief executive, told analysts on a conference call that the lower-than-expected earnings forecast reflects the company’s decision to stop selling many of its least expensive inkjet printers, focusing instead on laser printers and inkjets that can print, copy, scan and fax documents.That plan called for cutting inkjet printer sales by about 20 percent.”During the first half of the year, we lost some shelf space” at office supply stores and electronics outlets, Curlander said. “Since then, we’ve been improving.”Analysts had called the plan to dump some inkjet sales risky because of Lexmark’s business model. The company has traditionally lost money on printers and made its profits on replacement ink and toner supplies. Cutting out low-end sales risked losing ink buyers.On the other hand, the multifunction devices that the company is now spending more time developing and promoting use more ink than single-function printers, Curlander and others have argued.Lexmark Chief Financial Officer John Gamble said in an interview that the company is continuing to eliminate sales of unprofitable low-end printers, expand sales of higher-value inkjet and laser printers and expand its business and consulting services.”Those segments that we’ve been talking about all year, we think we had very good success in those,” Gamble said. “For the rest of this year and into next year, you’re going to see us continue with that strategy.”Goldman Sachs analyst Laura Conigliaro said the third-quarter figures show that Lexmark has successfully dumped much of its bundled business — deals under which buyers got a free printer with the purchase of a computer.In a research note, she said such deals, especially with Dell, lowered the average sales price of a Lexmark printer and hurt the company’s basic business model.”Lexmark’s performance through year-end should be strong, and Lexmark’s targets seem set for another big beat,” Conigliaro wrote in her report, referring to the lower-than-expected fourth-quarter earnings guidance.

     
Lexmark working hard to right itself
Stock recovers, but challenges remain
A year ago, Lexmark International began a protracted slump when executives cut their third-quarter earnings forecast, sending shares of the company into a tailspin that saw the stock lose almost 30 percent of its value in a single day.Now, as the company prepares to announce its third-quarter earnings on Tuesday, industry observers say the Lexington-based printer maker continues to face a series of challenges in its quest to turn the business around.The company has acted quickly in the past year, cutting or transferring hundreds of jobs, closing an inkjet cartridge production plant and focusing its printer introductions on high-growth product segments.The company also significantly reduced the number of inkjet printers it sells in bundles, printers that executives have said were not producing enough profit.Investors have rewarded the company’s strategy. Before last year’s slashed forecast, the company’s stock traded in the $60 range, but dropped almost $20 on Oct. 4, 2005. It’s recovered throughout the year and is now trading higher than it was before the fall.But the share price has approached or exceeded the target set by some analysts who, along with industry observers, caution that the company still has a gradual recovery ahead.”It’s hard to turn the battleship around quickly,” said Larry Jamieson, director of the Hard Copy Industry Advisory Service at Lyra Research.

Inkjet issues
Among Lexmark’s biggest changes in the past year was its decision to withdraw from about 20 percent of its inkjet sales, a group that includes a number of bundling agreements, where purchasers of a computer would receive a free or heavily discounted printer.The company called some of those agreements bad deals, as consumers fail to buy enough ink cartridges and supplies over the products’ lifetimes to offset low profit margins on the initial piece of hardware.The move has helped Lexmark’s gross margin in recent quarters because the inkjets in that group typically had lower margins on hardware sales than inkjet all-in-ones or laser printers.The tradeoff, said analyst Shannon Cross, is a smaller installed base of customers.That installed base is relied upon in the long term for sales of supplies like ink and toner. With fewer owners of its inkjet printers Ð albeit owners who didn’t print an overwhelming amount Ð the company could face earnings pressures at a time when it needs to be “more aggressive in terms of their investment in the business,” said Cross, managing director at Cross Research.Lexmark is in a quiet period before the announcement and declined to comment for this story.Part of the company’s ongoing strategy is to develop more printers for high-growth product segments.On the inkjet side, those segments are 3-in-1 and 4-in-1 products, typically referred to as all-in-one printers that include copying, scanning and sometimes faxing functions.For lasers, the company has focused on color lasers, laser all-in-ones and low-end monochrome laser printers.In the past year, the company introduced a spate of products in the categories, and continued to invest more money into research and development.But the research and development budgets pale in comparison to industry behemoth Hewlett-Packard.”The giant in the industry does about as nice a job as anybody in touching all the bases,” Jamieson said. “It’s almost like how can the other guys do about the same thing on a more limited budget.”

Advertising
Building up brand awareness has been another goal for the company in the past year. It recently launched an advertising campaign that touted how its printers go to work for some of the world’s largest businesses.Jamieson said the company should also consider using its marketing to point out more of the features of Lexmark printers.”They have some really good feature-rich products,” he said, noting the company’s progress in reducing the time it takes for a printer to start printing and its inclusion of duplexing features on more models. Duplexing allows printing on both sides of a page.”You don’t have to carry as many papers in your briefcase or you have fewer filing cabinets. The benefit is you’re using less space in your office,” he said.

Going forward
The company has said it expects third-quarter earnings per share to be 65 cents to 75 cents.Analysts surveyed by Thomson Financial expect 79 cents a share.Lexmark’s forecast amount excludes a charge of 16 cents a share related to a restructuring announced in January that included the closing of an inkjet cartridge manufacturing plant in Scotland.As part of the plan, the company is eliminating or transferring 1,350 jobs, including up to 200 in Lexington, to countries where wages are lower.Looking forward, Jamieson said he expects the next year may “still be a tough one to get rolling” for Lexington’s largest private employer. “It’s a tough battle.”

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November 2, 2006 at 2:35 PM